Twitter (TWTR) is one of those companies that often poses a conundrum to investors. On one hand, the...
Sometimes it doesn't look like the U.S. is trying very hard to create jobs
06/24/2011 8:30 am EST
True enough--the official unemployment rate has climbed to 9.1% in May from 9.0% in April and 8.8% in March—but I think Chairman Ben’s statement misses the main point about this jobless recovery.
The numbers now show that the jobs problem in the U.S. isn’t simply cyclical unemployment—that’s the kind the rises and falls with the cycles of the economy—but also a rise in structural unemployment—that the kind that’s doesn’t go down very much even when the economy picks up. The kind of patience that Bernanke advocates is absolutely the wrong medicine for an increase in structural unemployment.
Right now the data we have are starting to show a rather troubling and startling divergence: The number of job openings is rising but the number of people working isn’t climbing nearly as fast.
It looks increasingly like one gift from the Great Recession is going to be a rise in the permanent unemployment rate even in a good economy. That will mean more people out of work for the long term with all the pain that imposes on those workers and their families. And it will mean that the U.S. economy as a whole will grow more slowly in the future than it has in the past and than it might have without the damage inflicted by the Great Recession.
You know all about cyclical unemployment by this time in the Great Recession. The official unemployment rate, which doesn’t include discouraged workers who have stopped looking for work or workers with part-time jobs who would like full-time employment, stoods at 9.1% in May 2011. Way back in 2007 before the global financial crisis and the Great Recession, the official unemployment rate was 4.6%. In 2008 as the recession started to bite it climbed to 5.8% and then in 2009 it rocketed upward to 9.3%.
The unemployment rate follows, with some lag, the economic cycle. In 2007 the economy grew at an annual 3.2%, 2.3%, and 2.9% rate in the second, third and fourth quarters, respectively. In 2008 the annual growth rate dropped to a negative 0.7% in the first quarter, rebounded to a not terribly robust but positive 0.6% in the second quarter, and then fell off a cliff in the third quarter dropping at an annual rate of 4% before finishing the year at a negative 6.8%. The New Year started grimly with the economy shrinking at a 4.9% annual rate.
But the unemployment rate hasn’t dropped very much as the recovery from the Great Recession progressed. The post-recession unemployment rate did dip briefly to 8.8% from a high above 10% but it seems stubbornly stuck above 9%. And that’s after a 5% annual GDP growth rate in the fourth quarter of 2009 and growth rates of 3.1% and 3.7% in the first and fourth quarters of 2010.
That’s been a big puzzle to economists. The explanations range all over the political and economic spectrum. The 2009 economic stimulus package was too small. Or too big. Businesses are reluctant to hire because of inconsistent or too intrusive regulation. Businesses aren’t hiring because they’re moving operations offshore. The continuing decline in housing prices has sapped consumer confidence and spending. Rising income inequality has put a huge burden on the middle class. And on and on.
What most of these explanations have shared, however, is a belief that unemployment would be shrinking at the same speed as in the past as the economic cycle shifts from recession to growth except that something has happened this time to draw out the normal cyclical recovery in job growth.
A very few voices, however, have worried that maybe the slow recovery in job growth from the Great Recession is a sign of structural problems with the economy. And that’s starting to look more and more likely.
For instance, in the manufacturing sector, which has led the economy during the recovery, the number of jobs has declined since January 2009 but the number of available job openings has climbed to 230,000 from 98,000. Manpower, the employment company, reports that 52% of leading U.S. companies report difficulties in hiring essential staff. In 2010 Manpower’s survey showed 14% of companies reporting difficulties. McKinsey Global Institute found in a survey of 2,000 companies that 40% had positions open for at least six months because they couldn’t find suitable candidates
That data too anecdotal for you? Sorry but there aren’t any good comprehensive statistics on how many companies should be hiring but aren’t. It’s just too subjective. How many of the companies in McKinsey’s survey, for example, are using the “no suitable candidate” explanation as an excuse avoid hiring?
But there are estimates. Harry Holzer, an economist at Georgetown estimates that the unemployment rate would be 8% instead of 9.1% if existing job openings could be filled. The International Monetary Fund estimates that 25% of U.S. unemployment is structural.
If those estimates are right, then most of U.S. unemployment is still cyclical. And it should be attacked with the available tools for creating demand in the economy. You know what those tools are since we’ve tried most of them—not always in the best or most efficient fashion, I’ll grant you. The Federal Reserve has tried to create demand (even for houses) by keeping interest rates low. Congress and the President have tried to create demand by spending on infrastructure (too little, I’d argue), tax cuts, and investment tax credits to business to mention a few approaches.
It’s quite possible that these measures haven’t worked because the Great Recession was the deepest economic downturn in the U.S. since the Great Depression and that cyclical downturns, when they’re deep enough, are very difficult to reverse. Certainly the duration of the Great Depression suggests that.
But it’s also possible that these cyclical measures have been so ineffective because they’ve attacked only part of the unemployment problem. If companies are finding it hard to find workers with the right mix of skills, then demand creation isn’t going to work to reduce unemployment very quickly. Think of this mis-match of workers’ skills and job openings as yet another force slowing down job creation. If a company has to train new workers to bring their skills up to speed, then they have to be 100% totally convinced that the state of the economy makes the expenditure worthwhile. No company is going to spend six months training a worker only to discover that the orders it was counting on haven’t come in the door.
There are ways to attack this structural unemployment problem. The federal and state governments could pay for worker training through an expansion of the existing community college systems, grants to workers—unemployed and employed—for training, or subsidies to company- or industry-run apprenticeship programs like those in Germany.
Some of the existing programs in these areas—community college funding, for example—are among those things that have been hit hardest by state and local budget cuts. And there’s certainly a spirit in the land (I’ve always wanted to use that phrase) that says we can’t afford such frills.
Except that these aren’t frills. And they wouldn’t be even if the United States wasn’t trying to figure out a way to speed up job creation after the Great Recession.
If you look around the world—and take a point of view that stretches beyond the Great Recession—you’ll see that the great economic challenge of the next decades is competing on productivity and the skills of an economy’s work force. I don’t think you can escape that competition even if you’re a China—rising wages and incomes in that society are pushing the cheap-labor jobs to countries such as Indonesia, Bangladesh, and Vietnam. And you certainly can’t escape it if you’re an aging developed economy with a smaller percentage of the population in its prime working years. Figuring out how to get more out the workforce that you have is the next game that every economy will be forced to play.
And the United States doesn’t seem to be even half trying.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
Related Articles on STOCKS
Many investors are beginning to focus their funds on companies that follow sustainable business prac...
In addition to pioneering the electric vehicle market, Tesla (TSLA) is already in the vanguard of th...
The lack of consensus over what the market wants to do has resulted in a trading range for the past ...